Two key ways the SECURE act affects retirees and near-retirees

Late in 2019, Congress passed the SECURE Act—which stands for Setting Every Community Up for Retirement Enhancement. Among the many changes to IRAs, 401(k)s, other retirement plans, and several non-retirement provisions, there are two key ways the
SECURE Act has a direct impact on retirement income and estate planning for retirees and near-retirees.

Elimination of the “stretch” IRA provision. With the new act, most inherited IRAs must be fully distributed within ten years following the year of inheritance. Previously, an inherited IRA could be distributed over the
lifetime of the beneficiary. This typically meant that tax deferral would continue for a longer period of time if the beneficiary was younger than the decedent. For many beneficiaries, this change will result in a tax increase and may push beneficiaries
into a higher tax bracket—especially if the account is inherited during peak earning years.

A change in the start age for Required Minimum Distributions (RMDs) from 70½ to 72. This is in effect for people who had not turned 70½ as of 12/31/19. In addition to allowing taxes to defer slightly longer, this also
simplifies a somewhat confusing rule, with the timing of RMDs potentially impacted by whether you turned 70½ in the first or second half of the year. It is important to note that taxpayers who are between 70½ and 72 as of the end
of 2019 will need to continue to take their RMDs under the old schedule.

Impacts and opportunities for retirees and near-retirees

There are several impacts and opportunities associated with these changes. First, while the RMD age was changed to 72, the Qualified Charitable Distribution (QCD) timing did not change. This means that taxpayers who turn 70½ this year can still
make a QCD even though the RMD is not required.

Second, the elimination of the “stretch” IRA provision will have an impact on current estate planning. Now is a good time to meet with your estate planning attorney to evaluate a possible need to change beneficiaries. Specifically, if your
IRA currently has a trust named as the beneficiary, it is important to review the trust document and related beneficiaries in compliance with the new rule. This change to the code could also impact asset location between taxable and retirement accounts,
and asset allocation targets of individual portfolios.

Additionally, these changes make it even more important to educate the next generation financially. The “stretch” IRA arguably provided an artificial curb for spending down inherited IRAs. Now, most beneficiaries will need to distribute
100 percent of an inherited IRA within ten years. Adjusting taxable investments during the inherited IRA distribution years may help to reduce total income tax expenses. Finally, at the margins, partial Roth conversions prior to age 72 may be more
attractive given the delay in the start of RMDs and the fact that your beneficiaries may face a higher tax bracket due to the elimination of the “stretch” inherited IRA provision.

If you’re in or near retirement, now is a good time to meet with your wealth manager to discuss changes associated with the SECURE Act. If you have questions regarding any of the other provisions of the SECURE Act such as the creation of multi-employer
401(k) plans for your business, or the college planning implications of the bill, we can help with those as well.